Troubled Debt Restructurings – New Accounting Guidance

May 17, 2011

Cox Smith Banking and Financial Institutions E-Alert

Troubled Debt Restructurings – New Accounting Guidance

A recently issued FASB Accounting Standards Update ("Update") offers new guidance that may significantly change how creditors evaluate whether a restructuring constitutes a troubled debt restructuring ("TDR"). This is an important distinction because GAAP requires specific disclosures and accounting standards when a restructured receivable is deemed to be a TDR.

Current U.S. GAAP states that a TDR occurs when the creditor grants a concession to the debtor that it would not otherwise consider due to economic or legal reasons related to the debtor's financial difficulties. In response to concerns that creditors were inconsistently applying the guidance for identifying TDRs, FASB issued this Update, which offers additional guidance for determining whether a creditor has granted a concession and whether the debtor is experiencing financial difficulty.

Determining Whether a Concession Has Been Granted

Effective Interest Rate Test. The Update expressly prohibits creditors from using the so-called "effective interest rate test" when determining whether an interest rate concession has been granted. Its use by creditors in connection with TDRs may have resulted in inconsistent accounting practices.

Interest Rate Increases. The Update clarifies that a temporary or permanent increase in the contractual interest rate does not necessarily prove that a concession has been made, but should be considered along with all other restructured terms to determine whether a concession has been granted.

Payment Delays. A restructuring which results in an insignificant delay in payment does not constitute a concession, but when considered together with other factors, may indicate that a delay in payment is significant and would constitute a TDR.

Debtor's Access to Debt. In response to comment letter criticism, the Update clarifies that the debtor's lack of access to funds at a market rate may indicate that the creditor has granted a concession, but other factors must be considered as well.

Determining Whether a Debtor is Experiencing Financial Difficulties

The Update lists several indicators that should be considered to determine whether a debtor is experiencing financial difficulties, including whether it is probable that a debtor may default in the foreseeable future.

Effective Date

Public Entities. The new rules are effective for the first interim or annual period beginning on or after June 15, 2011. The standards must be applied retroactively to the beginning of the annual period of adoption, but for purposes of measuring impairment, a company should apply the new standards for the first reporting period on or after June 15.

Private Entities. The new rules are effective for annual periods on or after December 15, 2012, including interim periods within those annual periods.


This notice was authored by Shareholder Karen Neeley and Senior Counsel Jerry Sanchez from Cox Smith’s Banking and Financial Institutions Practice Group. Karen can be contacted in our Austin office at 512 703 6315 or  Jerry can be contacted in our Dallas office at 214 698 7835 or

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